**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      quarterly period ended: January 31, 2008





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from ___________________________ to
      ______________________________





Commission
      File Number: 0-11088





**ALFACELL
      CORPORATION**


(Exact
      name of registrant as specified in its charter)





Delaware
            
            22-2369085(State
                or other jurisdictionof
              organization)
            
            (I.R.S.
                Employer Identification No.)





300
      Atrium Drive, Somerset, NJ 08873


(Address
      of principal executive offices) (Zip Code)





(732)
      652-4525


(Registrant’s
      telephone number, including area code)





NOT
      APPLICABLE


(Former
      name, former address, and former fiscal year, if changed since last
      report.)





Indicate
      by check mark whether the registrant has (1) filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definitions of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
      Accelerated Filer oAccelerated
      Filer x Non-accelerated
      Filer oSmaller Reporting
      Company o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes oNo
x





The
      number of shares of Common Stock, $.001 par value, outstanding as of March
      5,
      2008 **** was
      47,066,880 shares.








**ALFACELL
      CORPORATION**


(A
      Development Stage Company)





**FORM
      10-Q**





**INDEX**





**Part
                I. Financial Information**Item
                1.
            Financial
                Statements
            3Condensed
                Balance Sheets
            3Condensed
                Statements of Operations
            4Condensed
                Statement of Stockholders' Equity
            5Condensed
                Statements of Cash Flows
            6Notes
                to Condensed Financial Statements
            9Item
                2.
            Management's
                Discussion and Analysis of Financial Conditon and Results of
                Operations
            17Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            25Item
                4.
            Controls
                and Procedures
            25**Part
                II. Other Information**Item
                1.
            Legal
                Proceedings
            26Item
                1A.
            Risk
                Factors
            26Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            30Item
                3.
            Defaults
                Upon Senior Securities
            31Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            31Item
                5.
            Other
                Information
            32Item
                6.
            Exhibits
            32**Signature
                Page**
            33




-
          2 -





**PART
      I. FINANCIAL INFORMATION**


Item
      1. Financial
      Statements





**ALFACELL
      CORPORATION**


(A
      Development Stage Company)





CONDENSED
      BALANCE SHEETS


January
      31, 2008 and July 31, 2007





January 31, 2008
              (Unaudited)
            
            July 31, 2007
              (See
                Note 1)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            10,207,924
            
            $
            6,968,172Prepaid
                expenses
            
            
            291,306
            
            
            150,207Loan
                receivable, related party
            
            
            185,161
            
            
            -Total
                current assets
            
            
            10,684,391
            
            
            7,118,379Property
                and equipment, net of accumulated depreciation and amortization of
                $314,736 at January 31, 2008 and $290,581 at July 31, 2007
            
            
            160,189
            
            
            136,723Loan
                receivable, related party
            
            
            -
            
            
            180,397Other
                assets
            
            
            350,000
            
            
            385,000Total
                assets
            
            $
            11,194,580
            
            $
            7,820,499LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            892,719
            
            $
            432,786Accrued
                clinical trial expenses
            
            
            860,125
            
            
            898,134Accrued
                professional service fees
            
            
            283,980
            
            
            322,051Accrued compensation expense
            
            
            113,154
            
            
            143,369Obligations under capital lease
            
            
            3,095
            
            
            -Other
                accrued expenses
            
            
            10,143
            
            
            33,560Total
                current liabilities
            
            
            2,163,216
            
            
            1,829,900Other
                liabilities:Obligations
                under capital lease
            
            
            18,762
            
            
            -Deferred
                rent
            
            
            190,262
            
            
            112,119Deferred
                revenue
            
            
            5,200,000
            
            
            100,000Total
                other liabilities
            
            
            5,409,024
            
            
            212,119Total
                liabilities
            
            
            7,572,240
            
            
            2,042,019Stockholders’
                equity:Preferred
                stock, $.001 par value. Authorized and unissued, 1,000,000 shares
            
            
            -
            
            
            -Common
                stock $.001 par value. Authorized 100,000,000 shares at January 31,
                2008
                and July 31, 2007; issued and outstanding 46,944,880 shares and 46,280,880
                shares at January 31, 2008 and July 31, 2007, respectively
            
            
            46,945
            
            
            46,281Capital
                in excess of par value
            
            
            100,060,999
            
            
            97,803,954Deficit
                accumulated during development stage
            
            
            (96,485,604
            )
            
            (92,071,755
            )Total
                stockholders’ equity
            
            
            3,622,340
            
            
            5,778,480Total
                liabilities and stockholders’ equity
            
            $
            11,194,580
            
            $
            7,820,499




See
      accompanying notes to condensed financial statements.


-
          3 -





**ALFACELL
      CORPORATION**


(A
      Development Stage Company)




CONDENSED
      STATEMENTS OF OPERATIONS





Three
      and
      six months ended January 31, 2008 and 2007,


and
      the
      Period from August 24, 1981


(Date
      of
      Inception) to January 31, 2008





(Unaudited)





August 24, 1981Three
                Months Ended
            
            Six
                Months Ended
            
            ****(Date
                ofJanuary
                31,****
            
            January
                31,
            
            Inception)****to2008
            
            2007
            
            2008
            
            2007
            
            January 31, 2008Sales
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            553,489Operating
                expenses:Cost
                of sales
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            336,495Research
                and development
            
            
            2,033,500
            
            
            1,472,578
            
            
            3,649,291
            
            
            3,042,763
            
            
            64,459,713General
                and administrative
            
            
            1,473,736
            
            
            1,061,743
            
            
            2,645,252
            
            
            1,987,781
            
            
            35,380,665Total
                operating expenses
            
            
            3,507,236
            
            
            2,534,321
            
            
            6,294,543
            
            
            5,030,544
            
            
            100,176,873Loss
                from operations
            
            
            (3,507,236
            )
            
            (2,534,321
            )
            
            (6,294,543
            )
            
            (5,030,544
            )
            
            (99,623,384
            )Investment
                income
            
            
            66,063
            
            
            98,539
            
            
            126,570
            
            
            221,872
            
            
            2,175,427Other
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            99,939Interest:Related
                parties, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,147,547
            )Others
            
            
            (1,256
            )
            
            -
            
            
            (1,256
            )
            
            (46
            )
            
            (2,875,428
            )Loss
                before state tax benefit
            
            
            (3,442,429
            )
            
            (2,435,782
            )
            
            (6,169,229
            )
            
            (4,808,718
            )
            
            (101,370,993
            )State
                tax benefit
            
            
            1,755,380
            
            
            510,467
            
            
            1,755,380
            
            
            510,467
            
            
            4,885,389Net
                loss
            
            $
            (1,687,049
            )
            $
            (1,925,315
            )
            $
            (4,413,849
            )
            $
            (4,298,251
            )
            $
            (96,485,604
            )Loss
                per basic and diluted commonshare
            
            $
            (0.04
            )
            $
            (0.04
            )
            $
            (0.10
            )
            $
            (0.10
            )Weighted
                average number of sharesoutstanding
            
            
            46,861,347
            
            
            44,846,064
            
            
            46,645,663
            
            
            44,595,902




See
      accompanying notes to condensed financial statements.


-
          4 -





**ALFACELL
      CORPORATION**


(A
      Development Stage Company)





CONDENSED
      STATEMENT OF STOCKHOLDERS' EQUITY




Period
      from July 31, 2007 to January 31, 2008




(Unaudited)





Common
                Stock
            
            Capital
                In
              Excess
                of par
              Value
            
            Deficit
              Accumulated
              During
              Development
              Stage
            
            Total
              Stockholders’
              EquityNumber
                of
              Shares
            
            AmountBalance
                at July 31, 2007
            
            
            46,280,880
            
            $
            46,281
            
            $
            97,803,954
            
            $
            (92,071,755
            )
            $
            5,778,480Exercise
                of stock options and warrants
            
            
            664,000
            
            
            664
            
            
            392,256
            
            
            —
            
            
            392,920Share-based
                compensation
            
            
            —
            
            
            —
            
            
            1,864,789
            
            
            —
            
            
            1,864,789Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,413,849
            )
            
            (4,413,849
            )Balance
                at January 31, 2008
            
            
            46,944,880
            
            $
            46,945
            
            $
            100,060,999
            
            $
            (96,485,604
            )
            $
            3,622,340





See
      accompanying notes to condensed financial statements.




-
          5 -








**ALFACELL
      CORPORATION**


(A
      Development Stage Company)





CONDENSED
      STATEMENTS OF CASH FLOWS





Six
      months ended January 31, 2008 and 2007,


and
      the
      Period from August 24, 1981


(Date
      of
      Inception) to January 31, 2008





(Unaudited)




August
                24, 1981Six
                Months Ended
              January
                31,
            
            (Date of Inception)
              to2008
            
            2007
            
            January 31, 2008Cash
                flows from operating activities:Net
                loss
            
            $
            (4,413,849
            )
            $
            (4,298,251
            )
            $
            (96,485,604
            )Adjustments
                to reconcile net loss to net cash provided by/(used in) operating
                activities:Gain
                on sale of marketable equity securities
            
            
            -
            
            
            -
            
            
            (25,963
            )Depreciation
                and amortization
            
            
            24,155
            
            
            19,175
            
            
            1,683,195Loss
                on disposal of property and equipment
            
            
            -
            
            
            -
            
            
            18,926Loss
                on lease termination
            
            
            -
            
            
            -
            
            
            30,964Share-based
                compensation
            
            
            1,864,789
            
            
            1,240,718
            
            
            12,497,330Amortization
                of deferred rent
            
            
            78,143
            
            
            -
            
            
            92,298Amortization
                of debt discount
            
            
            -
            
            
            -
            
            
            594,219Amortization
                of deferred compensation
            
            
            -
            
            
            -
            
            
            11,442,000Changes
                in assets and liabilities:Increase
                in prepaid expenses
            
            
            (141,099
            )
            
            (170,668
            )
            
            (351,173
            )Increase
                in loan receivable, related party
            
            
            (4,764
            )
            
            (4,763
            )
            
            (89,110
            )Decrease
                (increase) in other assets
            
            
            35,000
            
            
            -
            
            
            (350,000
            )Increase
                in interest payable-related party
            
            
            -
            
            
            -
            
            
            744,539Increase
                (decrease) in accounts payable
            
            
            459,933
            
            
            (920,388
            )
            
            1,399,354Increase
                in accrued payroll and expenses, related parties
            
            
            -
            
            
            -
            
            
            2,348,145(Decrease)
                increase in accrued expenses
            
            
            (129,712
            )
            
            (155,916
            )
            
            1,986,286Increase
                in deferred revenue
            
            
            5,100,000
            
            
            -
            
            
            5,200,000Net
                cash provided by (used in) operating activities
            
            
            2,872,596
            
            
            (4,290,093
            )
            
            (59,264,594
            )Cash
                flows from investing activities:Purchase
                of marketable equity securities
            
            
            -
            
            
            -
            
            
            (290,420
            )Purchase
                of short-term investments
            
            
            -
            
            
            -
            
            
            (1,993,644
            )Proceeds
                from sale of marketable equity securities
            
            
            -
            
            
            -
            
            
            316,383Proceeds
                from sale of short-term investments
            
            
            -
            
            
            -
            
            
            1,993,644Capital
                expenditures
            
            
            (23,843
            )
            
            (25,793
            )
            
            (1,594,839
            )Patent
                costs
            
            
            -
            
            
            -
            
            
            (97,841
            )Net
                cash used in investing activities
            
            
            (23,843
            )
            
            (25,793
            )
            
            (1,666,717
            )




(continued)


See
      accompanying notes to condensed financial statements.


-
          6 -








**ALFACELL
      CORPORATION**


(A
      Development Stage Company)





CONDENSED
      STATEMENTS OF CASH FLOWS, Continued





Six
      months ended January 31, 2008 and 2007,


and
      the
      Period from August 24, 1981


(Date
      of
      Inception) to January 31, 2008





(Unaudited)




August 24, 1981Six
                Months Ended
              January
                31,
            
            (Date of Inception)
              to2008
            
            2007
            
            January 31, 2008Cash
                flows from financing activities:Proceeds
                from short-term borrowings
            
            $
            -
            
            $
            -
            
            $
            874,500Payment
                of short-term borrowings
            
            
            -
            
            
            -
            
            
            (653,500
            )Increase
                in loans payable - related party, net
            
            
            -
            
            
            -
            
            
            2,628,868Proceeds
                from bank debt and other long-term debt, net ofcosts
            
            
            -
            
            
            -
            
            
            3,667,460Reduction
                of bank debt and long-term debt
            
            
            -
            
            
            -
            
            
            (2,966,568
            )Payment
                of capital lease obligation
            
            
            (1,921
            )
            
            -
            
            
            (1,921
            )Proceeds
                from issuance of common stock, net
            
            
            -
            
            
            (31,344
            )
            
            53,102,893Proceeds
                from exercise of stock options and warrants, net
            
            
            392,920
            
            
            852,750
            
            
            13,773,510Proceeds
                from issuance of convertible debentures, related party
            
            
            -
            
            
            -
            
            
            297,000Proceeds
                from issuance of convertible debentures, unrelated party
            
            
            -
            
            
            -
            
            
            416,993Net
                cash provided by financing activities
            
            
            390,999
            
            
            821,406
            
            
            71,139,235Net
                increase (decrease) in cash and cash equivalents
            
            
            3,239,752
            
            
            (3,494,480
            )
            
            10,207,924Cash
                and cash equivalents at beginning of period
            
            
            6,968,172
            
            
            11,518,540
            
            
            -Cash
                and cash equivalents at end of period
            
            $
            10,207,924
            
            $
            8,024,060
            
            $
            10,207,924Supplemental
                disclosure of cash flow information - interest paid
            
            $
            1,256
            
            $
            46
            
            $
            1,715,482Noncash
                financing activities:Issuance
                of convertible subordinated debenture for loan payable to
                officer
            
            $
            -
            
            $
            -
            
            $
            2,725,000Issuance
                of common stock upon the conversion of convertible subordinated
                debentures, related party
            
            $
            -
            
            $
            -
            
            $
            3,242,000Conversion
                of short-term borrowings to common stock
            
            $
            -
            
            $
            -
            
            $
            226,000Conversion
                of accrued interest, payroll and expenses by related parties to stock
                options
            
            $
            -
            
            $
            -
            
            $
            3,194,969Repurchase
                of stock options from related party
            
            $
            -
            
            $
            -
            
            $
            (198,417
            )Conversion
                of accrued interest to stock options
            
            $
            -
            
            $
            -
            
            $
            142,441Conversion
                of accounts payable to common stock
            
            $
            -
            
            $
            -
            
            $
            506,725




(continued)


See
      accompanying notes to condensed financial statements.


-
          7 -








**ALFACELL
      CORPORATION**


(A
      Development Stage Company)





CONDENSED
      STATEMENTS OF CASH FLOWS, Continued





Six
      months ended January 31, 2008 and 2007,


and
      the
      Period from August 24, 1981


(Date
      of
      Inception) to January 31, 2008





(Unaudited)





August 24, 1981Six
                Months Ended
              January
                31,
            
            (Date of Inception)
              to2008
            
            2007
            
            January
                31, 2008Conversion
                of notes payable, bank and accrued interest to long-term
                debt
            
            $
            -
            
            $
            -
            
            $
            1,699,072Conversion
                of loans and interest payable, related party and accrued payroll
                and
                expenses, related parties to long-termaccrued
                payroll and other, related party
            
            $
            -
            
            $
            -
            
            $
            1,863,514Issuance
                of common stock upon the conversion of convertible subordinated
                debentures, other
            
            $
            -
            
            $
            -
            
            $
            1,584,364Issuance
                of common stock for services rendered
            
            $
            -
            
            $
            -
            
            $
            2,460Lease
                incentive allowance
            
            $
            -
            
            $
            -
            
            $
            67,000Issuance
                of warrants with notes payable
            
            $
            -
            
            $
            -
            
            $
            594,219Acquisition
                of equipment through capital lease
            
            $
            23,778
            
            $
            -
            
            $
            23,778




See
      accompanying notes to condensed financial statements.


-
          8 -





**ALFACELL
      CORPORATION**


(A
      Development Stage Company)





NOTES
      TO
      CONDENSED FINANCIAL STATEMENTS





(Unaudited)





**1.**  **ORGANIZATION
      AND BASIS OF PRESENTATION**





In
      the
      opinion of management, the accompanying unaudited condensed financial statements
      of Alfacell Corporation (“Alfacell” or the “Company”) have been prepared in
      accordance with U.S. generally accepted accounting principles (“GAAP”) for
      interim financial information and with the instructions to Form 10-Q and Rule
      10-01 of Regulation S-X. Accordingly, they do not contain all of the information
      and notes required by U.S. GAAP for complete financial statements. In the
      opinion of the management, the accompanying unaudited condensed interim
      financial statements contain all adjustments (consisting of normal recurring
      adjustments) necessary to present fairly the Company’s financial position as of
      January 31, 2008, the results of its  operations for the three and six
      months ended January 31, 2008 and 2007, and the period from August 24, 1981
      (date of inception) to January 31, 2008, the changes in stockholders’ equity for
      the six months ended January 31, 2008, and its cash flows for the six month
      periods ended January 31, 2008 and 2007, and the period from August 24, 1981
      (date of inception) to January 31, 2008.  The results of operations for the
      three and six months ended January 31, 2008 are not necessarily indicative
      of
      operating results for fiscal year 2008 or future interim periods. The July
      31,
      2007 balance sheet presented herein has been derived from the audited financial
      statements included in the Company’s Annual Report on Form 10-K for the fiscal
      year ended July 31, 2007, filed with the Securities and Exchange
      Commission.





Certain
      footnote disclosures normally included in financial statements prepared in
      accordance with GAAP have been omitted in accordance with the rules and
      regulations of the Securities and Exchange Commission. The condensed financial
      statements in this report should be read in conjunction with the financial
      statements and notes thereto included in the Company’s Annual Report on Form
      10-K for the fiscal year ended July 31, 2007.




The
      Company is a development stage company as defined in Statement of Financial
      Accounting Standards No. 7, “Accounting and Reporting by Development Stage
      Enterprises.” The Company is devoting substantially all of its present efforts
      to establishing its business. Its planned principal operations have not
      commenced and, accordingly, no significant revenue has been derived
      therefrom.





Certain
      reclassifications have been made to prior year amounts to conform to the current
      year presentations.





The
      Company has reported net losses of approximately $1,687,000 and $4,414,000
      for
      the three and six months ended January 31, 2008, respectively and $8,755,000,
      $7,810,000 and $6,462,000 for the fiscal years ended July 31, 2007, 2006 and
      2005, respectively. The loss from date of inception, August 24, 1981, to January
      31, 2008 amounts to approximately $96,486,000.





The
      Company is continuing to develop its drug product candidates, which require
      substantial capital for research, product development, and market development
      activities. The Company has not yet initiated marketing of a commercial drug
      product. Future product development will require clinical testing, regulatory
      approval, and substantial additional investment prior to commercialization.
      The
      future success of the Company is dependent on its ability to make progress
      in
      the development of its drug


-
          9 -





**1.**  **ORGANIZATION
      AND BASIS OF PRESENTATION, Continued**





product
      candidates and, ultimately, upon its ability to attain future profitable
      operations through the successful manufacturing and marketing of those drug
      product candidates. There can be no assurance that the Company will be able
      to
      obtain the necessary financing or regulatory approvals to be able to
      successfully develop, manufacture, and market its products, or attain successful
      future operations. Accordingly, the Company’s future success is
      uncertain.





The
      Company expects that its cash balances as of January 31, 2008, will be
      sufficient to support its activities through the fourth quarter of its
        fiscal year 2009 based on its expected level of receipts and expenditures,
        which assumes timely and successful completion of its Phase IIIb clinical
        trial, and
      submission and approval of the related New Drug Application (“NDA”).
      The Company’s long-term continued operations will depend on its ability
      to raise additional funds through various potential sources such as equity
      and debt financing, collaborative agreements, strategic alliances, sale
      of tax benefits, revenues from the commercial sale of ONCONASE ® ,
      licensing of its proprietary RNase technology and out-licensing agreements
      with
      other companies for  its technology and
      its
      drug candidates. Such
      additional funds may not become available as the Company may need them
      or be available on acceptable terms. Insufficient funds could require the
      Company to
      delay, scale back, or eliminate one or more of its research and development
      programs or to license third parties to commercialize drug product candidates
      or
      technologies that the Company would otherwise seek to develop without
      relinquishing its rights thereto. Until and unless the Company’s
      operations generate significant revenues, the Company expects to continue
      to fund operations from equity financing or from up-front, milestone or
      other payments received in connection with licensing or strategic partnering
      agreements. There can be no assurance that the Company will be able to
      raise the capital it needs on terms which are acceptable, if at all. The
      Company may also obtain additional capital through the exercise of outstanding
      options and warrants and the sale of
      its tax benefits, although it cannot provide any assurance of such exercises
      or
      sale or the amount of capital it will receive, if any.





**2.**  **LOSS
      PER COMMON SHARE**





The
      following table sets forth the computation of basic and diluted net loss per
      common share:




Three
                Months Ended
              January
                31,****
            
            Six
                Months Ended
              January
                31,2008
            
            2007
            
            2008
            
            2007Numerator:Net
                loss
            
            $
            (1,687,049
            )
            $
            (1,925,315
            )
            $
            (4,413,849
            )
            $
            (4,298,251
            )Denominator:Weighted
                average number of commonshares
                outstanding
            
            
            46,861,347
            
            
            44,846,064
            
            
            46,645,663
            
            
            44,595,902Loss
                per common share - basic and diluted
            
            $
            (0.04
            )
            $
            (0.04
            )
            $
            (0.10
            )
            $
            (0.10
            )Potentially
          dilutive securities:Warrants
          
          
          15,235,034
          
          
          16,533,067
          
          
          15,235,034
          
          
          16,533,067Stock
          options
          
          
          5,299,067
          
          
          4,356,350
          
          
          5,299,067
          
          
          4,356,350Total
          potentially dilutive securities
          
          
          20,534,101
          
          
          20,889,417
          
          
          20,534,101
          
          
          20,889,417




-
          10 -





**2.**  **LOSS
      PER COMMON SHARE, Continued**







As
      the
      Company has incurred a net loss for all periods presented, basic and diluted
      per
      common share amounts are the same, since the inclusion of all potentially
      dilutive securities would be anti-dilutive.





**3.**  **SHARE-BASED
      COMPENSATION**





Effective
      August 1, 2005, the Company adopted Statement of Financial Accounting Standards
      123(R), “Share-Based Payment” (“SFAS 123(R)”), which requires all share-based
      payments, including stock option grants to employees, to be recognized as an
      operating expense in the statement of operations. The expense is recognized
      over
      the requisite service period based on fair values measured on the date of grant.
      The Company adopted SFAS 123(R) using the modified prospective method and,
      accordingly, prior period amounts have not been restated. Under the modified
      prospective method, the fair value of all new stock options issued after July
      31, 2005 and the unamortized fair market value of unvested outstanding stock
      options at August 1, 2005 are recognized as expense as services are rendered.





Shares,
      warrants and options issued to non-employees for services are accounted for
      in
      accordance with SFAS 123(R) and Emerging Issues Task Force Issue No. 96-18
      (“EITF 96-18”), “Accounting for Equity Instruments that are Issued to Other Than
      Employees for Acquiring or In Conjunction with Selling Goods or Services.” The
      fair value of such securities is recorded as an expense and capital in excess
      of
      par value in stockholders’ equity over the applicable service periods using
      variable accounting through the vesting date based on the fair market value
      of
      the securities at the end of each period or the vesting date.





The
      Company recorded the following share-based compensation expense under SFAS
      123(R) and EITF 96-18 based on the fair value of stock options.





Three
                Months Ended
              January
                31,
            
            Six
                Months Ended
              January
                31,2008
            
            2007
            
            2008
            
            2007Research
                and development
            
            $
            485,323
            
            $
            133,483
            
            $
            942,398
            
            $
            349,884General
                and administrative
            
            
            379,368
            
            
            342,729
            
            
            922,391
            
            
            707,009Total
                share-based compensation expense
            
            $
            864,691
            
            $
            476,212
            
            $
            1,864,789
            
            $
            1,056,893Basic
                and diluted loss per common share
            
            $
            0.02
            
            $
            0.01
            
            $
            0.04
            
            $
            0.02





The
      fair
      value of the stock options at the grant dates was estimated using the
      Black-Scholes option pricing model based on the weighted-average assumptions
      as
      noted in the following table. In accordance with SFAS 123(R), the calculated
      Black-Scholes value was reduced by applying a forfeiture rate,
      based upon historical pre-vesting cancellations of stock options. Estimated
      forfeitures are reassessed at each reporting period and may change based on
      new
      facts and circumstances. The risk-free interest rate for periods approximating
      the expected life of the option is based on the U.S. Treasury yield curve in
      effect at the time of grant. The expected stock price volatility is based on
      the
      historical volatility of the Company’s stock price. For post July 31, 2005
      grants, the expected term until exercise is derived using the “simplified”
method as allowed under the provisions of the Securities and Exchange
      Commission’s Staff Accounting Bulletin No. 110, and represents the period of
      time that options granted are expected to be outstanding. The “simplified”
method was used since the Company does not have sufficient historical data
      to
provide a basis to estimate a justifiable expected term.


-
          11 -





**3.**  **SHARE-BASED
      COMPENSATION, Continued**







Three
                Months Ended
              January
                31,
            
            Six
                Months Ended
              January
                31,2008
            
            2007
            
            2008
            
            2007Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %Risk-free
                interest rate
            
            
            3.08
            %
            
            4.73
            %
            
            3.08
            %
            
            4.69
            %Expected
                stock price volatility
            
            
            95.90
            %
            
            109.00
            %
            
            95.90
            %
            
            110.59
            %Expected
                term (years)
            
            
            4.58
            
            
            5.31
            
            
            4.58
            
            
            5.57Weighted
                average grant date fair value
            
            
            $ 1.24
            
            
            $   1.31
            
            
            $ 1.24
            
            
            $   1.24





The
      following table summarizes the stock option activity for the period August
      1,
      2007 to January 31, 2008:




Stock
              Options
              Outstanding
            
            Weighted
              Average
              Exercise
              Price
                Per
              Share
            
            Weighted
              Average
              Remaining
              Contractual
              Term
                (Years)
            
            Aggregate
              Intrinsic
              ValueBalance
                August 1, 2007
            
            
            4,867,039
            
            $
            2.85Granted
            
            
            635,000
            
            
            1.74Exercised
            
            
            (114,000
            )
            
            0.43
            
            
            
            
            $
            175,510Expired
            
            
            (63,000
            )
            
            1.92Forfeited
            
            
            (25,972
            )
            
            2.00Balance
                January 31, 2008
            
            
            5,299,067
            
            
            2.78
            
            
            6.26
            
            $
            3,370,534Exercisable
                as of January 31, 2008
            
            
            3,031,066
            
            
            3.22
            
            
            4.65
            
            $
            2,155,275Unvested
                as of January 31, 2008
            
            
            2,268,001
            
            
            2.19
            
            
            8.42
            
            $
            1,215,259





During
      the fiscal quarter ended January 31, 2008, the Company issued an aggregate
      of
      265,000 stock options to its board members with an exercise price of $1.72
      per
      share and six-year exercise term. The aggregate grant date fair market value
      of
      these options, $275,865, is being amortized over the one-year vesting
      period.  The Company recognized compensation expense of $22,989 for
      the fiscal quarter ended January 31, 2008.





During
      the fiscal quarter ended January 31, 2008, the Company issued an aggregate
      of
      40,000 stock options to various non-employee consultants for services rendered.
      The options vested immediately, have an exercise price of $1.75 per share and
      a
      ten-year exercise term. The aggregate grant date fair market value of these
      options, $52,840, was recognized as an expense by the Company for the fiscal
      quarter ended January 31, 2008.


-
          12 -





**3.**  **SHARE-BASED
      COMPENSATION, Continued**





During
      the fiscal quarter ended January 31, 2008, the Company issued an aggregate
      of
      330,000 stock options to various non-employee consultants for serving as the
      Company’s scientific advisors and research collaborators and for contributions
      made on behalf of the Company’s pre-clinical and clinical research programs. Of
      these options, 10,000 vested immediately, 50% of the balance will vest after
      one
      year and the remaining 50% of the balance will vest after two years. The options
      have an exercise price of $1.75 per share and a ten-year term. Under the
      variable accounting provisions of EITF 96-18, the aggregate grant date fair
      market value of these options, $456,730, is being amortized over the vesting
      period and the aggregate re-measured fair market value at January 31, 2008
      of
      $179,507 was recognized as an expense by the Company for the fiscal
      quarter ended January 31, 2008.





As
      of
      January 31, 2008, there was approximately $2,313,000 of total unrecognized
      compensation expense related to unvested options granted that is expected to
      be
      recognized over a weighted average period of 0.85 years. ****





**4.**  **CASH
      AND CASH EQUIVALENTS**





The
      Company considers all highly liquid investments purchased with an original
      maturity of three months or less to be cash equivalents. The carrying value
      of
      these investments approximates their fair market value due to their short
      maturity and liquidity.





**5.**  **LOAN
      RECEIVABLE, RELATED PARTY**





Amounts
      due from a loan to the Company’s Chief Executive Officer totaling $185,161 at
      January 31, 2008 and $180,397 at July 31, 2007 are classified as a current
      asset
      in loan receivable, related party as the loan is due, and payment is expected
      to
      be received, on August 1, 2008. In each of the six months ended January 31,
      2008
      and 2007, the Company accrued 8% interest in the amount of approximately $4,800
      on the unpaid principal balance.





**6.**  **OTHER
      ASSETS**





Lease
                security deposit held by a bank as collateral for a standby letter
                of
                credit in favor of the Company. The cash held by the bank is restricted
                as
                to use for the term of the standby letter of credit.
        
    $
    350,000





**7.**  **REVENUE
      RECOGNITION**





The
      Company recognizes revenue in accordance with Staff Accounting Bulletin No.
      104,
“Revenue Recognition” (“SAB 104”) issued by the staff of the SEC. Under SAB 104,
      revenue is recognized when persuasive evidence of an arrangement exists,
      delivery has occurred and/or services have been rendered, the sales price is
      fixed or determinable, and collectibility is reasonably assured.





The
      Company enters into marketing and distribution agreements, which contain
      multiple deliverables. Under the provisions of Emerging Issues Task Force
      No. 00-21, “Accounting for Revenue Arrangements with Multiple
      Deliverables”, the Company evaluates whether these deliverables constitute
      separate units of accounting to which total arrangement consideration is
      allocated. A deliverable qualifies as a separate unit of accounting when the
      item delivered to the customer has standalone value, there is objective and
      reliable evidence of fair value of items that have not been delivered to the
      customer, and, if


-
          13 -





7.REVENUE
      RECOGNITION, Continued





there
      is
      a general right of return for the items delivered to the customer, delivery
      or
      performance of the undelivered items is considered probable and substantially
      in
      the control of the Company. Arrangement consideration is allocated to units
      of
      accounting on a relative fair-value basis or the residual method if the Company
      is unable to determine the fair value of all deliverables in the arrangement.
      Consideration allocated to a unit of accounting is limited to the amount that
      is
      not contingent upon future performance by the Company. Upon determination of
      separate units of accounting and allocated consideration, the general criteria
      for revenue recognition is applied to each unit of accounting.





During
      the fiscal quarter ended January 31, 2008, the Company entered into a License
      Agreement for ONCONASE ® with Par
      Pharmaceutical, Inc. in the U.S. Under the terms of the License Agreement,
      on
      January 14, 2008, Strativa Pharmaceuticals (“Strativa”), the
      proprietary products division of Par Pharmaceutical, received exclusive
      marketing, sales and
      distribution rights to ONCONASE ® for the
      treatment of cancer in the United States and its territories. The Company
      retains all rights and obligations for product manufacturing, clinical
      development and obtaining regulatory approvals, as well as all rights for
      those non-U.S. jurisdictions in which it has not currently granted any
      such rights or
      obligations to third parties. Joint oversight committees with members from
      the
      Company and Strativa will manage the alliance. The Company received a cash
      payment of $5 million upon the signing of the License Agreement and will
      be entitled to an additional cash payment of up to $30 million upon FDA
      approval of
      ONCONASE ® for
      unresectable, or inoperable, malignant mesothelioma (“UMM”).
      The Company will also be entitled to receive up to $190 million in additional
      milestone payments in connection with the development of ONCONASE ® for up
      to three additional cancer indications and achieving certain net sales
      levels, in addition to receiving double-digit royalties on net sales of
      ONCONASE ® .
      In the
      event of approval of ONCONASE ® for a
      cancer indication in addition to UMM, the Company will have the option
      to co-promote ONCONASE ® in the
      United States, with support from Strativa. Strativa will provide technical
      expertise for a future Alfacell oncology sales force, as well as funding
      for certain associated costs. Under certain circumstances, the Company
      will have the
      right to co-promote ONCONASE ® ,
      at the
      Company’s cost, prior to the time ONCONASE ® is
      approved for any such additional cancer indication. The initial non-refundable
      cash payment received by the Company was allocated to deferred revenue
      and will
      be recognized ratably as revenue once the general criteria for revenue
      recognition have been met for the unit of accounting to which the payment
      has been allocated.





**8.**  **CAPITAL
      STOCK**




During
      the fiscal quarter ended October 31, 2007, the Company issued an aggregate
      of
      364,000 shares of its common stock upon the exercise of warrants and stock
      options by unrelated parties and employees at per share exercise prices ranging
      from $0.26 to $0.85. The Company realized aggregate gross proceeds of $198,920
      from these exercises.





During
      the fiscal quarter ended January 31, 2008, the Company issued an aggregate
      of
      300,000 shares of its common stock upon the exercise of warrants by unrelated
      parties at per share exercise prices ranging from $0.60 to $1.00. The Company
      realized aggregate gross proceeds of $194,000 from these exercises.




-
          14 -





**9.**  **SALE
      OF NET OPERATING LOSS CARRYFORWARDS**





New
      Jersey has enacted legislation permitting certain corporations located in New
      Jersey to sell a portion of their state tax loss carryforwards and state
      research and development credits in order to obtain state tax benefits. For
      the
      state fiscal year 2008 (July 1, 2007 to June 30, 2008), the Company had
      approximately $2,496,000 of total available state net operating loss
      carryforwards and state research and development credits that were saleable,
      of
      which New Jersey permitted the Company to sell approximately $1,969,000. In
      December 2007, the Company received approximately $1,755,000 from the sale
      of
      the $1,969,000 of state net operating loss carryforwards and state research
      and
      development credits that were saleable, which was recognized as state tax
      benefit for the six months ended January 31, 2008.




For
      the
      state fiscal year 2007 (July 1, 2006 to June 30, 2007), the Company had
      approximately $2,338,000 of total available state net operating loss
      carryforwards and state research and development credits that were saleable,
      of
      which New Jersey permitted the Company to sell approximately $574,000. In
      December 2006, the Company received approximately $510,000 from the sale of
      the
      $574,000 of state net operating loss carryforwards and state research and
      development credits, which was recognized as state tax benefit for the six
      months ended January 31, 2007.





**10.**  **COMMITMENTS
      AND CONTINGENCIES**





*License
      Agreements*





On
      July
      23, 1991, the Board of Directors authorized the Company to pay Kuslima Shogen,
      the Company’s founder and CEO, an amount equal to 15% of any gross royalties
      which may be paid to the Company from any license(s) with respect to the
      Company’s principal product, ONCONASE®, or any other products derived from
      amphibian source extract, produced either as a natural, synthesized, and/or
      genetically engineered drug for which the Company is the owner or co-owner
      of
      the patents, or acquires such rights in the future, for a period not to exceed
      the life of the patents. If the Company manufactures and markets its own drugs,
      then the Company will pay Ms. Shogen an amount equal to 5% of gross sales from
      any products sold during the term of the patents. On April 16, 2001, this
      agreement was amended and clarified to provide that Ms. Shogen would receive
      the
      15% royalty payment relating to licenses or 5% of net sales relating to sales
      but not both, unless the Company and the licensee both market the licensed
      product.





*Lease
      Commitments*





Future
      minimum lease payments under noncancelable operating and capital leases (with
      initial or remaining terms in excess of one year) as of January 31, 2008:





Payments
                Due in Fiscal YearTotal
            
            2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            2013
                andThereafterBuilding
                lease
            
            $
            3,094,770
            
            $
            68,640
            
            $
            275,445
            
            $
            302,036
            
            $
            317,446
            
            $
            317,446
            
            $
            1,813,757Equipment
                operating and capital lease
            
            
            133,935
            
            
            16,774
            
            
            33,548
            
            
            31,024
            
            
            25,976
            
            
            25,976
            
            
            637Total
                contractual cash obligations
            
            $
            3,228,705
            
            $
            85,414
            
            $
            308,993
            
            $
            333,060
            
            $
            343,422
            
            $
            343,422
            
            $
            1,814,394




-
          15 -





**10.**  **COMMITMENTS
      AND CONTINGENCIES, Continued**





*Contingencies*





The
      Company has product liability insurance coverage for clinical trials in the
      U.S.
      and in other countries where it conducts its clinical trials. No product
      liability claims have been filed against the Company. If a claim arises and
      the
      Company is found liable in an amount that significantly exceeds the policy
      limits, it may have a material adverse effect upon the financial condition
      and
      results of operations of the Company.




-
          16 -





**Item
      2.**  **Management's Discussion and Analysis of Financial Condition and Results of
      Operations**




Information
      herein contains, in addition to historical information, forward-looking
      statements that involve risks and uncertainties. All statements, other than
      statements of historical fact, regarding our financial position, potential,
      business strategy, plans and objectives for future operations are
“forward-looking statements.” These statements are commonly identified by the
      use of forward-looking terms and phrases as “anticipates,” “believes,”
“estimates,” “expects,” “intends,” “may,” “seeks,” "should,” or “will” or the
      negative thereof or other variations thereon or comparable terminology, or
      by
      discussions of strategy. We cannot assure you that the future results covered
      by
      these forward-looking statements will be achieved. The matters set forth in
      Part
      II Item 1A “Risk Factors” herein and Part I, Item 1A. “Risk Factors” in our most
      recent annual report on Form 10-K, filed on October 15, 2007, as amended by
      our
      subsequent quarterly reports on Form 10-Q, constitute cautionary statements
      identifying important factors with respect to these forward-looking statements,
      including certain risks and uncertainties, that could cause actual results
      to
      vary significantly from the future results indicated in these forward-looking
      statements. Other factors could also cause actual results to differ
      significantly from the future results indicated in these forward-looking
      statements.




**Overview**





We
      are a
      biopharmaceutical company engaged in the research, development, and
      commercialization of drugs for life threatening-diseases, such as malignant
      mesothelioma and other cancers. Our corporate strategy is to become a leader
      in
      the discovery, development, and commercialization of novel ribonuclease (RNase)
      therapeutics for cancer and other life-threatening diseases. As of January
      31,
      2008, we had 16 full time employees who conducted all administrative and
      research and development operations at our facility in Somerset,
      NJ.





We
      are a
      development stage company as defined in the Financial Accounting Standards
      Board’s Statement of Financial Accounting Standards No. 7, “Accounting and
      Reporting by Development Stage Enterprises.” We are devoting substantially all
      of our present efforts to establishing a new business and developing new drug
      products. Our planned principal operations of marketing and/or licensing new
      drugs have not commenced and, accordingly, we have not derived any significant
      revenue from these operations.




Since
      our
      inception in 1981, we have devoted the vast majority of our resources to the
      research and development of ONCONASE ® ,
      our
      lead drug candidate, as well as other related drug candidates. In recent years
      we have focused our resources towards the completion of the clinical program
      for
      ONCONASE ® in
      patients suffering from unresectable, or inoperable, malignant mesothelioma
      (“UMM”). We have incurred losses since inception and we have not received Food
      and Drug Administration (“FDA”) approval of any of our drug candidates. We
      expect to continue to incur losses for the foreseeable future as we continue
      our
      research and development activities, which include the sponsorship of human
      clinical trials for our drug candidates. Until we are able to consistently
      generate revenue through the sale of drug or non-drug products, we anticipate
      that we will be required to fund the development of our pre-clinical compounds
      and drug product candidates primarily by other means, including, but not limited
      to, licensing the development or marketing rights to some of our drug candidates
      to third parties, collaborating with third parties to develop our drug
      candidates, or selling Company issued securities.





During
      our fiscal quarter ended January 31, 2008, management’s efforts were primarily
      focused on our continued preparation of the ONCONASE ® rolling
      NDA and completing the negotiations of a U.S. License Agreement for
      ONCONASE ® with Par
      Pharmaceutical, Inc. Under the terms of the License


-
          17 -





Agreement,
      on January 14, 2008, Strativa Pharmaceuticals (“Strativa”), the proprietary
      products division of Par Pharmaceutical, received exclusive marketing, sales
      and
      distribution rights to ONCONASE ® for the
      treatment of cancer in the United States and its territories. We retain all
      rights and obligations for product manufacturing, clinical development and
      obtaining regulatory approvals, as well as all rights for those non-U.S.
      jurisdictions in which we have not currently granted any such rights or
      obligations to third parties. Joint oversight committees with members from
      Alfacell and Strativa will manage the alliance. We received a cash payment
      of $5
      million upon the signing of the License Agreement and will be entitled to an
      additional cash payment of up to $30 million upon FDA approval of
      ONCONASE ® for UMM.
      We will also be entitled to receive up to $190 million in additional milestone
      payments in connection with the development of ONCONASE ® for up
      to three additional cancer indications and achieving certain net sales levels,
      in addition to receiving double-digit royalties on net sales of
      ONCONASE ® .
      In the
      event of approval of ONCONASE ® for a
      cancer indication in addition to UMM, we will have the option to co-promote
      ONCONASE ® in the
      United States, with support from Strativa. Strativa will provide technical
      expertise for a future Alfacell oncology sales force, as well as funding for
      certain associated costs. Under certain circumstances, we will have the right
      to
      co-promote ONCONASE ® ,
      at our
      cost, prior to the time ONCONASE ® is
      approved for any such additional cancer indication. The Company will also supply
      all of Strativa’s requirements for ONCONASE ® pursuant
      to a Supply Agreement with Par Pharmaceutical, Inc. executed on January 14,
      2008.





Also
      during January 2008, we entered into a marketing and distribution agreement
      with
      BL&H Co. Ltd. for the
      commercialization of ONCONASE ®  in
      Korea,
      Taiwan and Hong Kong. Under the agreement, we received a $0.1 million up-front
      fee and are eligible to receive additional cash milestones and 50% of net
      sales in the territory .
      Additionally, we entered into a Purchase and Supply Agreement (the “Supply
      Agreement”) with Scientific Protein Laboratories LLC (“SPL”) ,
      in
      January 2008 .
      Under
      the Supply Agreement, SPL will manufacture and be our exclusive supplier
      for the
      bulk drug substance used to make ONCONASE ® .
      The
      term of the Supply Agreement shall be ten years and we have the right to
      terminate the Supply Agreement at any time without cause on two years prior
      notice to SPL.





Management
      changes during the quarter ended January 31, 2008, included the appointment
      of
      our CFO, Mr. Lawrence A. Kenyon to the additional role of Chief Operating
      Officer. Mr. Kenyon was also appointed to our board of directors in November
      2007. Additionally, in January 2008, Dr. David Sidransky, an independent
      director, was appointed Chairman of our board of directors, replacing our CEO,
      Ms. Kuslima Shogen, in that role. Ms. Shogen continues to serve as CEO and
      as a
      director. The purpose of these changes is to give Mr. Kenyon control of daily
      operations and to allow Ms. Shogen to focus her efforts on completion of the
      ONCONASE ® Phase
      IIIb clinical trial and rolling NDA.





Almost
      all of the $64.5 million of research and development expenses we have incurred
      since our inception has gone toward the development of ONCONASE ® and
      related drug candidates. For the six months ended January 31, 2008 and for
      the
      fiscal years ended July 31, 2007, 2006 and 2005, our research and development
      expenses were approximately $3.6 million, $5.5 million, $5.2 million, and $5.1
      million, respectively, almost all of which were used for the development of
      ONCONASE ® and
      related drug candidates. ONCONASE ® is
      currently in an international, centrally randomized, confirmatory Phase IIIb
      registration clinical trial. The primary endpoint of the trial is a
      statistically significant improvement in overall survival. The first interim
      analysis results based on one third of the required events (deaths) of the
      study, which evaluates the efficacy, safety and tolerability of the combination
      of ONCONASE ® +
      doxorubicin as compared to doxorubicin alone, have been reported. The median
      survival time (MST) demonstrated a trend favoring the ONCONASE ® +
      doxorubicin treatment group (12 months) over the doxorubicin group (10 months).
      A two month improvement in median survival had previously been observed in
      the
      Treatment Target Group (n=104) analysis from a previously completed Phase III
      single agent study that favored ONCONASE ® over
      doxorubicin treatments (11.6 months vs. 9.6 months). The


-
          18 -





Company’s
      Phase IIIb confirmatory registration trial was designed based on the conclusions
      drawn from the TTG analysis but powered to reach a statistically significant
      difference in overall survival between the ONCONASE ® +
      doxorubicin treatment group and the doxorubicin treatment group at 316 evaluable
      events. The interim data, which represented one third of the planned number
      of
      evaluable events, was sufficient for us to continue the trial as planned, but
      was not sufficient for supporting our filing for marketing approval at that
      time. To date, we have reached 313 evaluable events. Enrollment in the trial
      was
      completed in September 2007.





The
      timing of filing for marketing registrations in the US, European Union and
      Australia is data driven. Therefore, we cannot predict with certainty what
      our
      total cost associated with obtaining marketing approvals in all of these regions
      will be, or when and if such approvals will be granted, or when actual sales
      will occur. In the U.S., we have submitted all of the various components of
      our
      rolling NDA for ONCONASE ® that do
      not require the statistical analysis of the data from the Phase IIIb trial,
      in
      anticipation of potentially achieving favorable results. Estimated costs related
      to completion of the NDA will total at least approximately $4 million, of which,
      we estimate $2 million will be required to complete the NDA and $2 million
      will
      be allocated to manufacturing sufficient quantities of ONCONASE ® to
      complete the required testing of our manufacturing processes.





ONCONASE ® has been
      granted orphan drug designation for treatment of malignant mesothelioma by
      the
      FDA. Orphan drug designation permits us to be awarded seven years of marketing
      exclusivity for ONCONASE ® for the
      malignant mesothelioma indication upon FDA approval for this indication. Other
      benefits for which we are eligible with the orphan drug designation include
      protocol assistance by the FDA in the preparation of a dossier that will meet
      regulatory requirements, tax credits, research and development grant funding,
      and reduced filing fees for the marketing application. Previously, our
      ONCONASE ® development program received Fast Track Designation from the FDA for the
      treatment of malignant mesothelioma patients.





We
      also
      have previously received an Orphan Medicinal Product Designation for
      ONCONASE ® from the
      European Agency for the Evaluation of Medicinal Products, or EMEA, as well
      as
      Orphan Drug Designation for ONCONASE ® for
      malignant mesothelioma in Australia from the Therapeutics Goods Administration,
      or TGA. Orphan drug designations from these agencies provide benefits such
      as
      marketing exclusivity, reduced filing fees and regulatory guidance.





We
      fund
      the research and development of our products primarily from cash receipts
      resulting from the sale of our equity securities and convertible debentures
      in
      registered offerings and private placements. Additionally, we have raised
      capital in connection with license and collaboration agreements we have entered
      into with third parties and through other debt financings, the sale of our
      tax
      benefit and research products, interest income and financing received from
      our
      Chief Executive Officer. During the three months ended January 31, 2008, we
      received gross proceeds of approximately $194,000 from exercises of stock
      options and warrants. These proceeds will be used primarily to complete our
      confirmatory Phase IIIb clinical trial and support our anticipated filing of
      an
      NDA of ONCONASE ® for UMM,
      assuming satisfactory results from the ongoing clinical trial. We have incurred
      losses since inception and, to date, we have generated only small amounts of
      capital from marketing and distribution agreements for ONCONASE ® .




-
          19 -





**Results
      of Operations**





*Three
      month periods ended January 31, 2008 and 2007*





We
      focus
      most of our productive and financial resources on the development of
      ONCONASE ® and as
      such we did not have any sales in the three month periods ended January 31,
      2008
      and 2007.




Research
      and development expense for the three month period ended January 31, 2008 was
      approximately $2.0 million compared to approximately $1.5 million for the same
      period in 2007, an increase of approximately $0.5 million, or 38%. The increase
      was primarily related to increased expenses of approximately $0.4 million
      related to our preparations for a potential NDA submission upon reaching the
      required number of evaluable events in our confirmatory Phase IIIb
      ONCONASE ® clinical
      trial, and increased compensation expense of approximately $0.1 related to
      increased share-based compensation expense.




General
      and administrative expense for the three month period ended January 31, 2008
      was
      approximately $1.5 million compared to approximately $1.1 million for the same
      period in 2007, an increase of approximately $0.4 million, or 39%. This increase
      was due to increased legal expenses of approximately $0.2 million primarily
      related to negotiations that resulted in commercial partnerships for
      ONCONASE ® ,
      increased fees for professional services of approximately $0.1 million and
      increased general office expenses of approximately $0.1 million.




For
      the
      three month periods ended January 31, 2008 and January 31, 2007, our investment
      income was approximately $0.1 million.




The
      State
      of ** New
      Jersey has enacted legislation permitting certain corporations located in New
      Jersey to sell a portion of their state tax loss carryforwards and state
      research and development credits, or state net operating loss carryforwards,
      in
      order to obtain state tax benefit. For the state fiscal year 2008 (July 1,
      2007
      to June 30, 2008), we had approximately $2,496,000 of total available state
      net
      operating loss carryforwards and state research and development credits that
      qualified for sale, of which New Jersey permitted us to sell approximately
      $1,969,000. In December 2007, we received approximately $1,755,000 from the
      sale
      of the $1,969,000 of state net operating loss carryforwards and state research
      and development credits, which was recognized as state tax benefit for the
      three
      months ended January 31, 2008.




For
      the
      state fiscal year 2007 (July 1, 2006 to June 30, 2007), we had approximately
      $2,338,000 of total available state net operating loss carryforwards that
      qualified for sale, of which New Jersey permitted us to sell approximately
      $574,000. In December 2006, we received approximately $510,000 from the sale
      of
      the $574,000 of state net operating loss carryforwards, which was recognized
      as
      state tax benefit for the three months ended January 31, 2007.




The
      net
      loss for the three month period ended January 31, 2008 was approximately $1.7
      million as compared to $1.9 million for the same period last year, a decrease
      of
      approximately $0.2 million.




-
          20 -





*Six
      month periods ended January 31, 2008 and 2007*





We
      focus
      most of our productive and financial resources on the development of
      ONCONASE ® and as
      such we did not have any sales in the six month periods ended January 31, 2008
      and 2007.




Research
      and development expense for the six month period ended January 31, 2008 was
      approximately $3.6 million compared to approximately $3.0 million for the same
      period in 2007, an increase of approximately $0.6 million, or 20%. The increase
      was primarily due to increased compensation expense of approximately $0.4
      million, mostly related to share-based compensation, and increased expenses
      of
      approximately $0.2 million related to our preparations for a potential NDA
      submission upon reaching the required number of evaluable events in our
      confirmatory Phase IIIb ONCONASE ® clinical
      trial.




General
      and administrative expense for the six month period ended January 31, 2008
      was
      approximately $2.6 million compared to $2.0 million for the same period in
      2007,
      an increase of $0.6, or 30%. This increase was due to increased legal expenses
      of approximately $0.3 million which primarily related to negotiations that
      resulted in commercial partnerships for ONCONASE ® and
      increased compensation expense of approximately $0.3 million, mostly due to
      increased share-based compensation expense.




For
      the
      six month period ended January 31, 2008, our investment income was approximately
      $0.1 million compared to approximately $0.2 million for the same period in
      2007,
      a decrease of $0.1 million. This decrease was due to lower balances of cash
      and
      cash equivalents on hand for the six month period ended January 31, 2008 as
      compared to the same period in 2007.




The
      State
      of ** New
      Jersey has enacted legislation permitting certain corporations located in New
      Jersey to sell a portion of their state tax loss carryforwards and state
      research and development credits, or state net operating loss carryforwards,
      in
      order to obtain state tax benefit. For the state fiscal year 2008 (July 1,
      2007
      to June 30, 2008), we had approximately $2,496,000 of total available state
      net
      operating loss carryforwards and state research and development credits that
      qualified for sale, of which New Jersey permitted us to sell approximately
      $1,969,000. In December 2007, we received approximately $1,755,000 from the
      sale
      of the $1,969,000 of state net operating loss carryforwards and state research
      and development credits, which was recognized as state tax benefit for the
      six
      months ended January 31, 2008.




For
      the
      state fiscal year 2007 (July 1, 2006 to June 30, 2007), we had approximately
      $2,338,000 of total available state net operating loss carryforwards that
      qualified for sale, of which New Jersey permitted us to sell approximately
      $574,000. In December 2006, we received approximately $510,000 from the sale
      of
      the $574,000 of state net operating loss carryforwards, which was recognized
      as
      state tax benefit for the six months ended January 31, 2007.





The
      net
      loss for the six month period ended January 31, 2008 was approximately $4.4
      million as compared to $4.3 million for the same period last year, an increase
      of $0.1 million. The cumulative loss from the date of inception, August 24,
      1981
      to January 31, 2008, amounted to $96.5 million. We have incurred net losses
      during each year since our inception. Such losses are attributable to the fact
      that we are still in the development stage and, accordingly, have not derived
      sufficient revenues from operations to offset our development stage expenses.




-
          21 -





**Liquidity
      and Capital Resources**





We
      have
      reported cumulative net losses of approximately $23 million for the three most
      recent fiscal years ended July 31, 2007. The net losses from date of inception,
      August 24, 1981 to January 31, 2008 amounts to approximately $96.5 million.





We
      have
      financed our operations since inception primarily through the sale of our equity
      securities and convertible debentures in registered offerings and private
      placements. Additionally, we have raised capital in connection with license
      and
      collaboration agreements we have entered into with third parties and through
      other debt financings, the sale of our state tax benefits and research products,
      and investment income and financing received from our Chief Executive Officer.
      During the six months ended January 31, 2008, we received a cash payment of
      $5.0
      million as a non-refundable up-front fee for entering into a licensing agreement
      for ONCONASE ® with Par
      Pharmaceutical, Inc., approximately $1.8 million in the sale of our New Jersey
      state tax benefit, and approximately $0.4 million in proceeds from exercise
      of
      stock options and warrants. As of January 31, 2008, we had approximately
      $10.2 million in cash and cash equivalents. We currently believe that our
      cash and cash equivalents on hand at January 31, 2008 can support our activities
      through the fourth quarter of our fiscal year 2009 based on our expected level
      of receipts and expenditures, which assumes timely and successful completion
      of
      our Phase IIIb clinical trial, and submission and approval of the related
      NDA.





The
      primary use of cash over the next 12 months will be to fund our regulatory
      and
      commercial efforts for ONCONASE ® and our
      clinical and pre-clinical research and development efforts. The most significant
      expenses will be incurred in relation to completing the work necessary for
      our
      rolling NDA submission and completion of the ONCONASE ® Phase
      IIIb clinical trial. Additional expenses are also expected to be incurred as
      we
      continue to move our drug product candidates towards the next phase of clinical
      and pre-clinical development.





If
      still
      available under New Jersey law, we will attempt to sell the remaining $1,764,000
      of our state net operating loss carryforwards between July 1, 2007 and June
      30,
      2008 (state fiscal year 2008). This amount, which is a carryover of our
      remaining state net operating loss carryforwards from state fiscal year 2007,
      may increase if we incur additional net losses and research and development
      credits during state fiscal year 2008. We cannot estimate, however, what
      percentage of our state net operating loss carryforwards that qualify for sale
      New Jersey will permit us to sell, how much money we will receive in connection
      with the sale, if any, if we will be able to find a buyer for our state net
      operating loss carryforwards or if such funds will be available in a timely
      manner.





We
      may
      seek to satisfy future funding requirements through public or private offerings
      of securities or with collaborative or other arrangements with corporate
      partners. Additional financing may not be available when needed or on terms
      acceptable to us. If adequate financing is not available, we may be required
      to
      delay, scale back, or eliminate certain of our research and development
      programs, relinquish rights to certain of our technologies, drugs or products,
      or license third parties to commercialize products or technologies that we
      would
      otherwise seek to develop ourselves.





*Off-balance
      Sheet Arrangements*





We
      have
      no debt, no exposure to off-balance sheet arrangements,
      no
      special purpose entities, nor activities that include non-exchange-traded
      contracts accounted for at fair value as of January 31, 2008.




-
          22 -





*Contractual
      Obligations and Commercial Commitments*





Future
      minimum lease payments under non-cancelable operating and capital leases (with
      initial or remaining terms in excess of one year) as of January 31, 2008:





Payments
                Due in Fiscal YearTotal
            
            2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            2013
                andThereafterBuilding
                lease
            
            $
            3,094,770
            
            $
            68,640
            
            $
            275,445
            
            $
            302,036
            
            $
            317,446
            
            $
            317,446
            
            $
            1,813,757Equipment
                operating and capital lease
            
            
            133,935
            
            
            16,774
            
            
            33,548
            
            
            31,024
            
            
            25,976
            
            
            25,976
            
            
            637Total
                contractual cash obligations
            
            $
            3,228,705
            
            $
            85,414
            
            $
            308,993
            
            $
            333,060
            
            $
            343,422
            
            $
            343,422
            
            $
            1,814,394





*Critical
      Accounting Policies and Estimates*





Critical
      accounting policies are those that involve subjective or complex judgments,
      often as a result of the need to make estimates. The following areas all
        require the use of judgments and estimates: research and development
        expenses, accounting for share-based compensation, accounting for warrants
        issued with convertible debt and deferred income taxes. Estimates in
        each of these areas are
      based on historical experience and various assumptions that we believe
        are appropriate. Actual results may differ from these estimates. Our
        accounting practices are discussed in more detail in "Management's Discussion
        and Analysis of Financial Condition and Results of Operations" and Note
        1 of "Notes to
      Consolidated Financial Statements" in our Annual Report on Form 10-K for
      the year ended July 31, 2007.





*Recently
      Issued Accounting Standards*





In
      December 2007, the Financial Accounting Standards Board ("FASB") issued
      Statement No. 141(R) "Business Combinations". This Statement establishes
      principles and requirements for how the acquirer of a business recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, and any noncontrolling interest in the acquiree. The
      Statement also provides guidance for recognizing and measuring the goodwill
      acquired in the business combination and determines what information to disclose
      to enable users of the financial statements to evaluate the nature and financial
      effects of the business combination. The guidance will become effective as
      of
      the beginning of a company's fiscal year beginning after December
      15, 2008 .
      We
      believe that this new pronouncement will not have a material impact on our
      financial statements in future periods.





On
      December 21, 2007, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin (“SAB”) No. 110 ("SAB 110") to permit entities, under
      certain circumstances to continue to use the "simplified" method, in developing
      estimates of expected term of "plain-vanilla" share options in accordance with
      Statement No. 123R, “Share-Based Payment”. SAB 110 amended SAB 107 to permit the
      use of the "simplified" method beyond December 31, 2007. We believe that the
      adoption of SAB 110 will not have a material impact on our consolidated
      financial statements.





In
      June
      2007, the FASB issued Emerging Issues Task Force ** (“EITF”)
      Issue No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or
      Services to Be Used in Future Research and Development Activities,” (“EITF
      07-03”). EITF 07-03 addresses the diversity that exists with respect to the
      accounting for the nonrefundable portion of a payment made by a research and
      development entity for future research and development activities. The EITF
      concluded that an entity must defer and


-
          23 -





capitalize
      nonrefundable advance payments made for research and development activities
      and
      expense these amounts as the related goods are delivered or the related services
      are performed. EITF 07-03 will be effective for interim or annual reporting
      periods in fiscal years beginning after December 15, 2007. We are currently
      evaluating the impact that the adoption of EITF 07-03 will have, if any, on
      our
      financial statements.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 159 “The Fair Value Option for Financial Assets and Financial
      Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many
      financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value. SFAS 159 will be effective
      for
      our company on August 1, 2008. We are currently evaluating the impact of the
      adoption of SFAS 159 will have, if any, on our financial
      statements.





In
      December 2006, the FASB issued a FASB Staff Position (“FSP”) EITF Issue No.
      00-19-2 "Accounting for Registration Payment Arrangements" ("FSP 00-19-2")
      which
      addresses an issuer's accounting for registration payment arrangements. FSP
      00-19-2 specifies that the contingent obligation to make future payments or
      otherwise transfer consideration under a registration payment arrangement,
      whether issued as a separate agreement or included as a provision of a financial
      instrument or other agreement, should be separately recognized and measured
      in
      accordance with SFAS No.5 "Accounting for Contingencies." The guidance in FSP
      00-19-2 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
      Activities," and No.150, "Accounting for Certain Financial Instruments with
      Characteristics of both Liabilities and Equity", and FASB Interpretation No.45,
      "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
      Indirect Guarantees of Indebtedness of Others" to include scope exceptions
      for
      registration payment arrangements. FSP 00-19-2 is effective immediately for
      registration payment arrangements and the financial instruments subject to
      those
      arrangements that are entered into or modified subsequent to the date of issue
      of FSP 00-19-2. For registration payment arrangements and financial instruments
      subject to those arrangements that were entered into prior to the issuance
      of
      FSP 00-19-2, this is effective for financial statements issued for fiscal years
      beginning after December 15, 2006, and interim periods within those fiscal
      years. We have analyzed the provisions of FSP 00-19-2 and determined that it
      will not have an effect on our financial statements.





In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value, and expands disclosures about fair value measurements. SFAS 157 does
      not
      require new fair value measurements. We are required to adopt SFAS 157 as of
      August 1, 2008, and are currently evaluating the impact that the adoption of
      SFAS 157 will have, if any, on our reported financial results.





In
      September 2006, the SEC issued SAB No. 108 “Quantifying Misstatements in
      Financial Statements” (“SAB 108”). Under SAB 108, we are required to use a
      combination of the two previously-acceptable approaches for quantifying
      misstatements, and to adjust our financial statements if this combined approach
      results in a conclusion that an error is material. We adopted SAB 108 and
      determined that it did not have a material impact on our reported financial
      results.





-
          24 -








In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”). 
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in a
      company’s financial statements in accordance with Statement No. 109, “Accounting
      for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a company’s tax return. On August 1,
      2007, we adopted FIN 48 and determined that it did not have a material impact
      on
      our reported financial results.




**Item
      3.**  **** **Quantitative
      and Qualitative Disclosures About Market Risk**





As
      of
      January 31, 2008, we were exposed to market risks, primarily changes in U.S.
      interest rates. As of January 31, 2008, we held total cash and cash equivalents
      of approximately $10.2 million. All cash equivalents have a maturity less than
      90 days. Declines in interest rates over time would reduce our interest
      income from our investments. Based upon our balance of cash and cash equivalents
      as of January 31, 2008, a decrease in interest rates of 1.0% would cause a
      corresponding decrease in our annual interest income of approximately
      $102,000.





**Item
      4.** **Controls
      And Procedures**





(a)  Evaluation
      of disclosure controls and procedures.





Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we evaluated the effectiveness
      of
      the design and operation of our "disclosure controls and procedures" (as defined
      in Rule 13a-15(e) under the Securities Exchange Act of 1934 ("the Exchange
      Act")
      as of January 31, 2008, the end of the period covered by this report. Based
      on
      this evaluation, the Chief Executive Officer and the Chief Financial Officer
      have concluded that our disclosure controls and procedures are effective to
      ensure that information required to be disclosed by us in the reports that
      we
      file or submit under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the rules and forms of the
      Securities and Exchange Commission including without limitation, controls and
      procedures that are designed to ensure that the information required to be
      disclosed in reports by us that we file or submit under the Exchange Act is
      accumulated and communicated to our management, including our principal
      executive and principal financial officers, as appropriate to allow timely
      discussion regarding required disclosures.




(b)
      Changes in internal controls.





There
      has
      been no changes in our internal control over financial reporting during the
      quarter ended January 31, 2008 that has materially affected, or is reasonably
      likely to materially affect, the Company's internal control over financial
      reporting subsequent to the date of the evaluation referred to
      above.




-
          25 -





**PART
      II.**  **OTHER
      INFORMATION**





**Item
      1.**  **** **Legal
      Proceedings**





None.





**Item
      1A.**  **** **Risk
      Factors**





Below
      are
      the risk factors that have been revised since the filing of our Annual Report
      on
      Form 10-K for the year ended July 31, 2007 (the “2007 Form 10-K”) on October 15,
      2007.   You are urged to read these risk factors in the 2007 Form 10-K
      in addition to the following revised risk factors set forth
      below.  Each of the risk factors set forth here and in our 2007 Form
      10-K could materially adversely affect our business, operating results and
      financial condition, as well as the value of an investment in our common
      stock.   Additional risks and uncertainties not presently known
      to us, or those we currently deem immaterial, may also materially harm our
      business, operating results and financial condition.





**We
      are highly dependent on achieving success in the clinical testing, regulatory
      approval, and commercialization of ONCONASE** **®** **and our other compounds currently under development. If we fail to obtain the
      necessary regulatory approvals, we will not be allowed to commercialize
      ONCONASE** **®** **and our business will be harmed.**





The
      FDA
      in the United States and comparable regulatory agencies in foreign countries
      impose substantial pre-market approval requirements on the introduction of
      pharmaceutical products. These requirements involve the completion of lengthy
      and detailed pre-clinical and clinical testing and other costly and time
      consuming procedures. Satisfaction of these requirements typically takes several
      years depending on the level of complexity and novelty of the product. The
      length of time required to complete a clinical trial depends on several factors
      including the size of the patient population, the ability of patients to get
      to
      the site of the clinical study, and the criteria for determining which patients
      are eligible to join the study. A significant portion of our expenditures have
      been devoted, and in the future will be devoted, to the clinical trials for
      our
      lead product candidate, ONCONASE ® and
      activities related to the preparation and filing of the NDA for ONCONASE for
      the
      treatment of malignant mesothelioma. Although we believe we could modify some
      of
      our expenditures to reduce our cash outlays in relation to our clinical trials
      and other NDA related expenditures, we cannot quantify the amount by which
      such
      expenditures might be modified. A delay in the commercial sale of
      ONCONASE ® or sales
      of ONCONASE ® which
      did not result in significant revenue to us, would increase the time frame
      during which our cash flow would be negative, which, in turn, might require
      us
      to seek additional financing. Such financing may not be available, and even
      if
      it is available, it may not be available on terms favorable or acceptable to
      us.





We
      are
      approaching the scheduled completion of our confirmatory Phase IIIb clinical
      trial of ONCONASE ® as a
      treatment for malignant mesothelioma. Data from an interim analysis based on
      the
      first 105 events (deaths) showed a two-month survival advantage of
      ONCONASE ® +
      doxorubicin (12 months) vs. doxorubicin (10 months). These results were
      consistent with data from the previous Phase III clinical trial and were the
      basis for our decision to continue the trial. The primary endpoint of the Phase
      IIIb clinical trial is survival, which tracks the length of time patients
      enrolled in the study live. According to the protocol, 316 evaluable patient
      deaths must occur in order to perform the required statistical analyses to
      determine the efficacy of ONCONASE ® in
      patients with unresectable (inoperable) malignant mesothelioma. As of March
      7,
      2008, we had confirmed that 313 evaluable patient deaths had occurred. While
      we
      expect to be able to confirm that the required 316 evaluable patient deaths
      have
      occurred in the relatively near future, it is impossible to predict when that
      will occur and we cannot apply for FDA,


-
          26 -





EMEA
      or
      TGA approval to market ONCONASE ® until
      the clinical trials and all other registration requirements have been
      met.





Several
      factors could prevent the successful completion or cause significant delays
      of
      these trials including an inability to enroll a sufficient number of patients
      and a failure to demonstrate that the product is safe and effective in humans.
      Also if safety concerns develop, the FDA, EMEA and TGA could stop our trials
      before their completion. Drugs in late stages of clinical development may fail
      to show the desired safety and efficacy results despite having progressed
      through initial clinical testing. While previous limited clinical trials with
      ONCONASE ® have
      produced certain favorable results in the treatment of unresectable malignant
      mesothelioma, we cannot be certain that the final results of the current Phase
      IIIb clinical trial will support the filing of an NDA with the FDA or the
      approval of an NDA by the FDA. We or the FDA may suspend clinical trials at
      any
      time on various grounds, including a finding that the subjects or patients
      are
      being exposed to an unacceptable health risk.





All
      statutes and regulations governing the conduct of clinical trials are subject
      to
      future changes by various regulatory agencies, including the FDA, which could
      affect the cost and duration of our clinical trials. Any unanticipated costs
      or
      delays in our clinical studies would delay our ability to generate product
      revenues and to raise additional capital and could cause us to be unable to
      fund
      the completion of the studies.





We
      may
      not market or sell any product for which we have not obtained regulatory
      approval. We cannot assure you that the FDA or other regulatory agencies will
      ever approve the use of our products that are under development. Even if we
      receive regulatory approval, such approval may involve limitations on the
      indicated uses for which we may market our products. Further, even after
      approval, discovery of previously unknown problems could result in additional
      restrictions, including withdrawal of our products from the market.





If
      we
      fail to obtain the necessary regulatory approvals, we cannot market or sell
      our
      products in the United States or in other countries and our long-term viability
      would be threatened. If we fail to achieve regulatory approval or foreign
      marketing authorizations for ONCONASE ® we will
      not have a product suitable for sale or product revenues for quite some time,
      if
      at all, and may not be able to continue operations.





Our
      profitability will depend on our ability to develop, obtain regulatory approvals
      for, and effectively market ONCONASE ® as well
      as entering into strategic alliances for the development of new drug candidates
      from the out-licensing of our proprietary RNase technology. The
      commercialization of our pharmaceutical products involves a number of
      significant challenges. In particular, our ability to commercialize
      ONCONASE ® depends
      on the success of our clinical development programs, our efforts to obtain
      regulatory approval and our sales and marketing efforts or those of our
      marketing partners, directed at physicians, patients and third-party payors.
      A
      number of factors could affect these efforts including:





·
            our
                ability to demonstrate clinically that our products have utility
                and are
                safe;


·
            delays
                or refusals by regulatory authorities in granting marketing
                approvals;


·
            our
                limited financial resources relative to our
                competitors;


·
            our
                ability to obtain and maintain relationships with current and additional
                marketing partners;


·
            the
                availability and level of reimbursement for our products by third
                party
                payors;


·
            incidents
                of adverse reactions to our
                products;


·
            misuse
                of our products and unfavorable publicity that could result;
                and


-
          27 -





·
            the
                occurrence of manufacturing or distribution
                disruptions.





We
      will
      seek to generate revenue through licensing, marketing and development
      arrangements prior to receiving revenue from the sale of our products. To date
      we have entered into one US license agreement and three non-US regional
      marketing and distribution agreements and we may not be able to successfully
      negotiate any additional agreements. In the past, we have entered into several
      development arrangements which have resulted in limited revenues for us. We
      cannot assure investors that these arrangements or future arrangements, if
      any,
      will result in significant amounts of revenue for us in the future. We,
      therefore, are unable to predict the extent of any future losses or the time
      required to achieve profitability, if at all.





**We
      will need additional financing to continue operations, which may not be
      available on favorable or acceptable terms, if it is available at
      all.**





We
      estimate that as of January 31, 2008, our then existing cash reserves should
      be
      sufficient to support our activities through the fourth quarter of our fiscal
      year 2009 based on our expected level of expenditures, which assumes timely
      and
      successful completion of our Phase IIIb clinical trial, and submission and
      approval of the related NDA. Regardless of the results from our current clinical
      trial, we will need additional financing to conduct our business after July
      31,
      2009. If the outcome of our Phase IIIb clinical trial results in a marketing
      approval of ONCONASE by the FDA, we will be eligible to receive significant
      cash
      milestone payments from our US marketing partner. If the results of our Phase
      IIIb clinical trial do not demonstrate the efficacy and safety of
      ONCONASE ® for
      malignant mesothelioma, or if we are delayed in submitting the related NDA,
      the
      receipt of milestone payments may be delayed or may not occur at all and our
      ability to raise additional capital could be adversely affected. Factors that
      would affect the amount and timing of additional capital required include,
      but
      are not limited to, the following:





·
            the
                progress and cost of completing and filing marketing registrations
                for
                ONCONASE®with the FDA in the United States, with the EMEA in Europe and with
                the
                TGA in Australia;


·
            our
                degree of success in commercializing our drug product candidates,
                including entering into additional marketing and distribution
                agreements;


·
            the
                progress and cost of research and development and clinical trial
                activities relating to our drug product
                candidates;


·
            the
                costs of preparing, filing and prosecuting patent applications,
                maintaining and enforcing our patent claims and other intellectual
                property rights and investigating and defending against infringement
                claims asserted against us by
                others;


·
            the
                emergence of competing technologies and other adverse market
                developments;


·
            changes
                in or terminations of our existing licensing, marketing and distribution
                arrangements;


·
            the
                amount of milestone payments we may receive from current and future
                collaborators, if any; and


·
            the
                cost of manufacturing scale-up and development of marketing operations,
                if
                we undertake those activities.




Additional
      financing may not be available when we need it or be on terms acceptable to
      us.
      If adequate financing is not available, we may be required to delay, scale-back,
      or eliminate certain of our research and development programs, to relinquish
      rights to some of our technologies or products, or to grant licenses to third
      parties to commercialize products or technologies that we would otherwise seek
      to develop ourselves. We could also be required to cease operations. If
      additional capital is raised through the sale of equity, our stockholders’
ownership interest could be diluted and such newly-issued
      securities


-
          28 -





may
      have
      rights, preferences, or privileges superior to those of our other stockholders.
      The terms of any debt securities we may sell to raise additional capital may
      place restrictions on our operating activities. Failure to secure additional
      financing may cause us to delay or abandon some or all of our development
      programs.





**We
      are and will be dependent upon third parties for manufacturing our products.
      If
      these third parties do not devote sufficient time and resources to our products
      our revenues and profits may be adversely affected.**





We
      do not
      have the required manufacturing facilities to manufacture our product. We
      presently rely on third parties to produce ONCONASE ® for use
      in clinical trials. We have entered into a ten year purchase and supply
      agreement with Scientific Protein Laboratories, LLC, or SPL, for the
      manufacturing of ranpirnase (protein drug substance) from the oocytes, or the
      unfertilized eggs, of the *Rana
      pipiens* frog,
      which is found in the Northwest United States and is commonly called the leopard
      frog.





Additionally,
      we contract with Ben Venue Corporation for the manufacturing of
      ONCONASE ® and with
      Catalent and Aptuit for the labeling, storage and shipping of
      ONCONASE ® for
      clinical trial use. We utilize the services of these third party manufacturers
      solely on an as needed basis with terms and prices customary for our
      industry.





We
      use
      FDA GMP licensed manufacturers for ranpirnase and ONCONASE ® .
      We have
      identified several alternative service providers for the manufacturing services
      for which we may contract. In order to replace an existing service provider
      we
      must amend our IND to notify the FDA of the new manufacturer. Although the
      FDA
      generally will not suspend or delay a clinical trial as a result of replacing
      an
      existing manufacturer, the FDA has the authority to suspend or delay a clinical
      trial if, among other grounds, human subjects are or would be exposed to an
      unreasonable and significant risk of illness or injury as a result of the
      replacement manufacturer.





We
      intend
      to rely on third parties to manufacture our products if they are approved for
      sale by the appropriate regulatory agencies and are commercialized. Third party
      manufacturers may not be able to meet our needs with respect to the timing,
      quantity or quality of our products or to supply products on acceptable
      terms.





**Because
      we do not have in-house marketing, sales or distribution capabilities, we have
      contracted with third parties and expect to contract with third parties in
      the
      future for these functions and we will therefore be dependent upon such third
      parties to market, sell and distribute our products in an effort to generate
      revenues.**





We
      currently have no in-house sales, marketing or distribution capabilities. In
      order to commercialize any product candidates for which we receive FDA or non-US
      approval, we expect to rely on established third parties who have strategic
      partnerships with us to perform these functions. To date, we have entered into
      a
      license agreement with Par Pharmaceutical, Inc. in the US and three marketing
      and distribution agreements for ONCONASE ® in
      regions outside the US. We cannot assure you we will be able to maintain these
      relationships or establish new relationships with biopharmaceutical or other
      marketing companies with existing distribution systems and direct sales forces
      to market any or all of our product candidates on acceptable terms, if at
      all.




-
          29 -





In
      addition, we expect to begin to incur significant expenses in determining our
      commercialization strategy with respect to one or more of our product candidates
      for regions outside the US. The determination of our commercialization strategy
      with respect to a product candidate will depend on a number of factors,
      including:





·
            the
                extent to which we are successful in securing third parties to collaborate
                with us to offset some or all of the funding obligations with respect
                to
                product candidates;


·
            the
                extent to which our agreement with our collaborators permits us to
                exercise marketing or promotion rights with respect to the product
                candidate;


·
            how
                our product candidates compare to competitive products with respect
                to
                labeling, pricing, therapeutic effect, and method of delivery;
                and


·
            whether
                we are able to establish agreements with third party collaborators,
                including large biopharmaceutical or other marketing companies, with
                respect to any of our product candidates on terms that are acceptable
                to
                us.




**If
      we lose key management personnel or are unable to attract and retain the talent
      required for our business, our business could be materially
      harmed.**





We
      are
      highly dependent on the principal members of our management team, including,
      but not limited to, Kuslima Shogen, our founder and Chief Executive Officer,
      and
      Lawrence A. Kenyon, our Chief Operating Officer, Chief Financial Officer
        and Corporate Secretary. None of the members of our management team have
        employment contracts with us. We do not have key man insurance on any
        of our management. If
      we were to lose the services of Ms. Shogen, Mr. Kenyon, or other members
        of our
      management team, and were unable to replace them, our product development
        and the achievement of our strategic objectives could be delayed.





In
      addition, our success will depend on our ability to attract and retain qualified
      commercial, scientific, technical, and managerial personnel. While we have
      not
      experienced unusual difficulties to date in recruiting and retaining personnel,
      there is intense competition for qualified staff and there is no assurance
      that
      we will be able to retain existing personnel or attract and retain qualified
      staff in the future.





**Material
      weaknesses or deficiencies in our internal control over financial reporting
      could harm stockholders’ and business partners’ confidence in our financial
      reporting, our ability to obtain financing, and other aspects of our
      business.**





Internal
      control over financial reporting can provide only reasonable and not absolute
      assurance that deficiencies or weaknesses are identified. Additionally,
      potential control deficiencies that are not yet identified could emerge and
      internal controls that are currently deemed to be in place and operating
      effectively are subject to the risk that those controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate. Identification and corrections of these
      types of potential control deficiencies could have a material impact on our
      business, financial position, results of operations and disclosures and impact
      our ability to raise funds.





**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





(a)
      Recent Sales of Unregistered Securities




During
      the quarter ended January 31, 2008, we issued 200,000, 65,000 and 35,000 shares
      to McCash Family Limited Partnership, Donna McCash Irrevocable Trust and an
      unrelated private party,


-
          30 -





respectively,
      upon the exercise of warrants at an exercise price ranging from $0.60 to $1.00
      per share, which resulted in gross proceeds of $194,000. We have previously
      registered the resale of these shares by the stockholders on a Form S-3
      registration statement.





The
      above
      transactions with the McCash Family Limited Partnership and Donna McCash
      Irrevocable Trust, who are accredited investors as such term is defined under
      Regulation D of the Securities Act of 1933, as amended (the “Securities Act”),
      were exempt from registrations under Section 4(2) of the Securities Act. The
      above transaction with the unrelated private party, who we reasonably believed
      had such knowledge and experience in financial and business matters that she
      was
      capable of evaluating the merits and risks of the prospective investment, was
      exempt from registration under Section 4(2) of the Securities Act. We did not
      engage in any public advertising or general solicitation in connection with
      the
      either the issuance or exercise of the above warrants. The net proceeds from
      these transactions will be used for general corporate purposes.





(b)
      Purchases of Equity Securities by Issuer and Affiliated Purchasers





None.





**Item
      3.**  **** **Defaults
      Upon Senior Securities**





None.





**Item
      4.** **Submission
      of Matters to a Vote of Security Holders**





(a)
            An
                annual meeting of stockholders was held on January 30,
                2008.





(b)
            All
                of our current directors, Kuslima Shogen, John P. Brancaccio, Stephen
                K.
                Carter, Donald R. Conklin, Lawrence A. Kenyon, James J. Loughlin,
                David
                Sidransky and Paul M. Weiss, were elected at the annual
                meeting.





(c)
            The
                matters voted upon at the annual meeting and the results of the voting,
                including broker non-votes where applicable, are set forth
                below:





(i)  For the
      election of directors





Director
            
            Number
                of Shares of
              Common
                Stock Voted For
            
            Number
                of Shares of
              Common
                Stock Withheld
            
            Number
                of Broker
              Non-VotesKuslima
                Shogen
            
            
            36,379,016
            
            
            1,849,663
            
            
            0John
                P. Brancaccio
            
            
            34,133,803
            
            
            4,094,876
            
            
            0Stephen
                K. Carter
            
            
            34,133,557
            
            
            4,095,122
            
            
            0Donald
                R. Conklin
            
            
            34,138,458
            
            
            4,095,221
            
            
            0Lawrence
                A. Kenyon
            
            
            34,139,154
            
            
            4,089,525
            
            
            0James
                J. Loughlin
            
            
            34,133,557
            
            
            4,095,122
            
            
            0David
                Sidransky
            
            
            33,972,863
            
            
            4,255,816
            
            
            0Paul
                M. Weiss
            
            
            34,133,158
            
            
            4,095,521
            
            
            0




-
          31 -








(ii)
            Proposal
                to ratify the appointment of J.H. Cohn LLP as our independent registered
                public accounting firm for the year ending July 31,
                2008.





Number
                of Shares of
              Common
                Stock Voted
              For
            
            Number
                of Shares of
              Common
                Stock Voted
              Against
            
            Number
                of Shares of
              Common
                which Abstained
              from
                Voting
            
            Number
                of
              Broker
                Non-
              Votes37,726,874
            
            
            290,008
            
            
            211,798
            
            
            0





**Item
      5.**  **** **Other
      Information**





None.





**Item
      6.**  **Exhibits**





Exhibits
      (numbered in accordance with Item 601 of Regulation S-K).




Exhibit
              No.
            
            Item
                Title10.41
            
            License
                Agreement, dated January 14, 2008, between the Company and Par
                Pharmaceutical, Inc.*10.42
            
            Supply
                Agreement, dated January 14, 2008, between the Company and Par
                Pharmaceutical, Inc.10.43
            
            Purchase
                and Supply Agreement, dated January 14, 2008, between the Company
                and
                Scientific Protein Laboratories LLC31.1
            
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            
            Certification
                Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 200232.2
            
            Certification
                Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002





*
                  Portionsof
                      this exhibit have been redacted and filed separately with the
                      SEC pursuant
                      to a confidential treatment
                      request




-
          32 -





**SIGNATURE
      PAGE**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.




ALFACELL
                CORPORATION(Registrant)March
                7, 2008
            /s/
                Lawrence A. Kenyon*Chief
                Financial Officer*(Principal
                Accounting Officer and
              Principal
                Financial Officer)




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          33 -